How Does Facebook make money: Facebook Business Model Explained

The Facebook business model generates over $70 billion in revenue, $8 billion in net income and has over 2.5 billion users globally. The global social media platform sells advertising to businesses that use the data Facebook collects on users to target ads. Facebook advertising revenues accounted for 98.52% of total revenues.

Facebook is one of the biggest companies in the world, the most widely used and extremely profitable.

What makes Facebook so successful is that it has a powerful combination of the broadest reach, richest user data and best in class ad targeting tools.

In 2015, 71% of teens were active on Facebook. Currently, only 51% of American teenagers between 13 and 17 years old, use Facebook.

94% of Facebook Ad revenue is from mobile.

The average cost per click for a Facebook Ad is $1.72.

Top companies Owned By Facebook

1. Instagram

Facebook purchased Instagram for $1 billion on April 9, 2012. At the time Instagram wasn’t generating any revenue.

The social media statistics show that there are over one billion people worldwide using Instagram at least once per month in 2019, and more than one-fifth (20.6%) of internet users worldwide would use Instagram.

2. Whatsapp

Facebook acquired WhatsApp for a reported $19 billion on February 19, 2014.

The social media statistics show that there are over 1.5 billion users in 180 countries which makes WhatsApp the most popular messaging app in the world.

3. Oculus VR

Facebook acquired Oculus VR on March 25, 2014 for a reported $2.3 billion in cash and stock. Since Facebook’s purchase of Oculus VR in 2014, Oculus has made multiple acquisitions of its own. Perhaps the most noteworthy was the 2015 purchase of Surreal Vision, a company specializing in 3D scene mapping reconstruction.

Facebook Games

Facebook Games wants a cut of the 3+ hours per week that young adult video gamers spend watching other people play. It launched Fb.gg in 2019 and has is specifically targeting competitors such as Twitch. Facebook takes a cut of ‘tips’ and fan subscriptions.

Facebook Audience Network

Facebook Audience Network is a direct competitor to Google’s Adsense. FAN (Facebook audience network) is an advertising network powered by Facebook which appears on apps and mobile websites other than just Facebook family companies.

Instagram

Instagram was created by Mike Krieger and Kevin Systrom in 2010. Initially, it was mainly designed to help people share photos and videos, both publicly and privately. As a result of early success, it was acquired by Facebook in 2012. In a short time, Instagram has become one of the biggest social media sites.

Whatsapp

WhatsApp is an instant and secure messaging application. It was founded by Jan Koum and Brian Acton in 2009 and later bought by Facebook for $19 billion in 2014. It now has over 1.5 billion users. Unlike the other services, Whatsapp has yet to be monetized – giving plenty of headroom for future growth.

The Facebook Business Model

The Facebook Business Model and How it Makes Money

The Facebook business model relies upon using multiple business model patterns, but overall its dominant pattern is the hidden-revenue model.

Facebook Business Model Canvas

Facebook Business Model Canvas

How Does Facebook Make Money?

Facebook makes its money by selling advertising to businesses. In 2019, Facebook generated over $70 billion in revenue and had a net income of $18 billion. 92% of all revenue comes from ads on mobile devices.

How Facebook makes money

US and Canada still are the dominate geography for ad revenue accounting for 48.6% of total revenue in Q 2019.

The notable higher average revenue per user is not only because of the more prosperous economy of the US and Canada vs developing countries. With a limited amount of space and Facebook being the dominant social network ad costs are much higher.

Asia-Pacific will continue to be an opportunity for Facebook, outside of China which has its own social networks, and across the region. It rules in India, Indonesia, Thailand, and Singapore. It is still among the top three big social media websites in Japan and Taiwan. Source: Wearesocial.

How Much Money Does Facebook Make Per User?

The average revenue per user worldwide is $8.52 as posted by Facebook in its Q4 2019 financial report.

The average revenue per user (ARPU) has steadily grown year on year across all regions. As of Q4, 2019 the average revenue per user by region is as follows:

US & Canada: $41.41

Europe: $13.21

Asia-Pacific: $3.57

Rest of World: $2.48

Why Advertisers Love Facebook

The majority of ad revenue Facebook, a whopping ninety-two per cent comes from businesses paying to target people on mobile devices. Why?

The majority of the world uses Facebook on their mobile phone (source: Wearesocial). Advertisers go where the eyes go.

Facebook business model – how users spend their time by device – Source Wearesocial

Advertisers spend money where people spend the most time and pay the most attention.

In other words, how long people spend on a social media platform makes it more attractive to an advertiser. However, the level of engagement rates also affects the choice – how much content is shared.

The majority of Facebook’s reported ad revenue is generated across three platforms:

Facebook

Facebook messenger

Instagram

Facebook doesn’t break-down its ad revenue by platform. However, according to reports, Instagram, the photo-sharing app, generates more than a quarter of Facebook’s total ad revenue.

That would mean Instagram generated about $20 billion in 2019, which makes it bigger than Youtube at $15 billion.

Facebook Revenue Growth By Region

The Facebook business model – how Facebook makes money by geographical region

Despite the political distractions affecting the company over the past two years, Facebook’s business has been on a roll.

It now has over 2.5 billion people using Facebook, Instagram, WhatsApp and Messenger services each day. While there is no doubt that Facebook earnings and revenue growth will slow, the social media giant keeps creating new ways to monetize its user base and it has yet to monetize Whatsapp – a question that remains is if this is possible without losing users.

Taking a deeper dive into the figures you can see that in Asia-Pacific over the last four years the number of users has doubled in Asia-Pacific, the largest growth coming from India. During the same-time quarterly ad revenue has grown by over 400%.

Despite low growth in users in the US and Canada, Facebook ad revenue per user has grown significantly. This is a reflection of the limited ad space available and more marketers now competing for that space.

Sources of Expense for Facebook

Facebook has expenses that it incurs across its operations. Here is a breakdown of its main expenses and how they affect its overall revenue model.

Facebook business model expenses

Cost of Revenue

The cost of revenue represents the costs associated with operations such as infrastructure that Facebook needs to deliver its services. It includes the following:

facility and IT equipment expenses and depreciation.

energy and bandwidth costs.

support and maintenance costs.

Research & Development

Facebook is the world’s number one social media network. However, to stay ahead of the competition Facebook needs to spend money to ensure it stays relevant, competitive and harnesses new technologies.

Facebook does this in two ways:

Research and development expenditures.

Acquisitions of companies – buy Intellectual Property and expertise of the teams.

Hence, R&D is of utmost importance to Facebook to retain and to grow. Research and development is a significant expense for Facebook that will continue.

Marketing and sales cost

Facebook’s marketing and sales costs are consistently around 14% of its total revenue. How does marketing spend its marketing money? Facebook spends a considerable amount of its money through public relations across the globe.

The controversy surrounding Facebook continues across several countries and Facebook employs several agencies to help manage its reputation.

General and Administrative

This includes compensation to the employees of administrative departments and other legal and accounting expenses.

Facebook Acquisitions – A Strong Gaming Theme

The latest string of acquisitions reveals some of how the ways that Facebook intends to strengthen its gaming capabilities and improve the revenue stream from Oculus VR.

Recent gaming acquisitions:

Sanzaru Games (Feb 25, 2020): Sanzaru’s develops games for Occulus VR – it has made of a total of four titles for Oculus since 2016.

PlayGiga (Dec 19, 2019): A cloud-based gaming company based out of Madrid that was founded in 2013. Cloud gaming refers to console-quality games that are streamed to devices connected to the Internet.

Beat Games (Nov, 2019): A game studio behind Beat Saber, VR’s most popular game so far. Beat Saber, a rhythm game that’s equal parts Fruit Ninja and Guitar Hero using light sabers.

CTRL-Labs (Sep 23, 2019): CTRL-lab’s bracelet detects tiny electrical impulses from muscle fibres in, say, your arm, and translates those signals into movement on a screen. Note: lots of applications for this but I’ve just placed this into gaming for now.